Chapter 16 Real Estate Financing Practice

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9th. Edition

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Chapter Sixteen Real Estate Financing Practice:

Chapter Sixteen Real Estate Financing Practice ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2018

The Federal Reserve System :

The Federal Reserve System Page 300 12 Federal Banks in 12 Districts with member banks Federal Reserve ( the “Bankers Bank”) Maintain sound credit conditions Counteract inflation and recession Create a favorable economic climate Regulates the flow of money and interest rates Chapter 16 Real Estate Financing Practice

The Federal Reserve System :

Reserve Requirements By regulating How much cash reserves members banks need too keep or they control money available for loans. Discount Rate By increasing or decreasing the Interest rate they charge member banks who borrow from the reserve bank they control interest rates for home loans. Open Market Operations The Fed buys and sells government bonds. As they buy bonds this increases bond yields which in turn reduce mortgage rates Page 300 The Federal Reserve System Chapter 16 Real Estate Financing Practice

PRIMARY MORTGAGE MARKET:

PRIMARY MORTGAGE MARKET Lenders that originate mortgage loans Thrifts Savings Associations Commercial Banks Insurance Companies Credit Unions Pension Funds Endowment Funds Investment Groups Mortgage Banking Mortgage Brokers Mutual Savings Banks Page 301 Chapter 16 Real Estate Financing Practice

SECONDARY MORTGAGE MARKET:

SECONDARY MORTGAGE MARKET Page 302 Purchases Loans made in Primary Market Federal Housing Finance Authority Fannie May Federal National Mortgage Ass. Purchases Conventional & FHA & VA notes Ginnie May Government National Mortgage Ass. Purchases Special Assistance ( i.e. Farm) Loans Freddie Mac Federal Home Loan Mortgage Corp. Purchases Conventional notes only Chapter 16 Real Estate Financing Practice

FINANCING TECHNIQUES :

FINANCING TECHNIQUES Straight Loan Interest only with “Balloon” payment of entire principal at the end of the term Amortized Loan Direct reduction loan payment is part principal and part interest. Last payment extinguishes both Principal and Interest due. Page 304 Chapter 16 Real Estate Financing Practice

FINANCING TECHNIQUES :

FINANCING TECHNIQUES Amortized Loan Fixed Rate /Level Payment The loans we use today. Adjustable Rate Mortgage Index – national cost of funds Margin – profit due lender Cap – adjustment limitations Page 304-305 Chapter 16 Real Estate Financing Practice

FINANCING TECHNIQUES :

FINANCING TECHNIQUES Balloon Payment Loan Growing-Equity Mortgage (GEM) Reverse-Annuity Mortgage (RAM) Nonrecourse Loan Page 306-307 Final Payment Larger Chapter 16 Real Estate Financing Practice

CONVENTIONAL LOANS :

CONVENTIONAL LOANS Most Secure loans for Lender Risk all on lender Typically 10% 20 % down Private Mortgage Insurance (PMI) ( if less than 20% down) 28% PITI Front End Ratio ( PITI/Monthly Income) 36% Back End Ratio ( Annual Expenses/Annual Income High Credit Score ( Above 640) Page 307 Chapter 16 Real Estate Financing Practice

FHA LOANS :

FHA LOANS Federal Housing Agency ( HUD) Loan Limits for FHA Insured ( vary by area) Single Family $365,700 loan limit (i.e. DuPage County 1.1.15) Two Units $538,500 Three Units $565,900 Four Units $702,500 Page 309 Chapter 16 Real Estate Financing Practice

FHA LOAN Advantages:

FHA LOAN Advantages Page 309 Advantages 2.7% -4% down payment ( allows “gift” money) Non-occupant co-borrower Lower credit score ( 500) Assumable ( new buyer must “qualify”) 29 % - 41 % Ratios Chapter 16 Real Estate Financing Practice

FHA LOAN Disadvantages:

FHA LOAN Disadvantages Extra Monthly Insurance Premium added to PITI ( 1.3%) Up Front Premium at Closing (1.75% of loan) Loan Origination Points at Closing Generally 15 yr. to 30 yr. Fixed rate Chapter 16 Real Estate Financing Practice

VA GUARANTEED LOANS :

VA GUARANTEED LOANS Certificate of eligibility Eligible veterans and their existing spouses Unremarried spouses of deceased Veterans when the death was military related Certificate of reasonable value Page 310 Chapter 16 Real Estate Financing Practice

VA GUARANTEED LOANS:

VA GUARANTEED LOANS Certificate of eligibility Eligible veterans and their existing spouses Unremarried spouses of deceased Veterans when the death was military related Certificate of reasonable value Page 310 Chapter 16 Real Estate Financing Practice

VA LOANS ADVANTAGES :

VA LOANS ADVANTAGES 100% financing Maximum mortgage $729,750 Guarantee 25% not to exceed $104,250 Liberal qualifying ratio 41% No monthly mortgage insurance premiums Extra Chapter 16 Real Estate Financing Practice

VA LOANS Advantages :

VA LOANS Advantages Owner occupied only No prepayment penalties Assumption rules Buyer cannot pay commissions Extra Chapter 16 Real Estate Financing Practice

Slide17:

Purchase Money Mortgage Owner becomes the Mortgagee Blanket Mortgage One loan over many parcels providing for “partial releases Package Mortgage Loan which packages both personal and real property Page 310 OTHER FINANCING TECHNIQUES ) Chapter 16 Real Estate Financing Practice

Slide18:

Open End Mortgage home equity loan GEM Increasing amounts of the payment is applied to principal Construction Loan Short term amounts released as builder needs money Sale Lease Back Seller becomes tenant and buyer/landlord Buy down Pay to buy down the interest rate for a few years. Page 312 OTHER FINANCING TECHNIQUES ) Chapter 16 Real Estate Financing Practice

Slide19:

Truth In Lending Act -Purpose is to inform borrowers of the “ true cost” involved when they borrow money from a lender Applies to residential real estate loans and refinancing APR (%) must be Disclosed whenever a TRIGGER Term us used Right of rescission or cancellation ( not on RE loans) Page 313 TRUTH IN LENDING – REG Z Chapter 16 Real Estate Financing Practice

TRUTH IN LENDING - REG Z:

TRUTH IN LENDING - REG Z Requires disclosure of all financing costs AKA Regulation Z Three-day right of rescission Advertising APR (Annual Percentage Rate) Page 313 Chapter 16 Real Estate Financing Practice

APR CALCULATIONS:

APR CALCULATIONS Facts: Loan amount: $475,000 Contact Interest rate = 5% Extra However Add In: Appraisal Fee of $500 Loan Origination of 2 % ( $9500) Application Fee $250 Documentation Fee $450 APR = 5.6% Chapter 16 Real Estate Financing Practice

Slide22:

Settlement Costs Booklet -@loan application Loan Estimate- @3days Use RESPA Closing Disclosure Statement Must use at closing Must allow borrower opportunity to review 3 days prior to closing One of the primary Goals is to prohibit “kickbacks” TRID and Loan Estimate Requires the lender to give to buyer Page 314

Chapter Sixteen Quiz Questions :

Chapter Sixteen Quiz Questions ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2018

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